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The US-China Trade War and What US Companies Should Consider

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On Monday, the Trump administration imposed a third round of tariffs on Chinese goods. In a statement released Friday, President Trump explained the additional tariffs affect “roughly $200 billion of imports from China.” They’re now set at 10 percent and will rise to 25 percent on January 1.

Trump warned that if China retaliates, the US will respond by placing tariffs on $267 billion of additional Chinese imports. This threatened final round of tariffs would effectively capture all China’s imports to the US.

The statement says the escalation comes as a result of China’s unwillingness to change its trade practices, which “plainly constitute a grave threat to the long-term health and prosperity of the United States economy.” These practices include “numerous unfair policies and practices relating to United States technology and intellectual property — such as forcing United States companies to transfer technology to Chinese counterparts.”

In a nod to his political base, President Trump indicated the US tariffs ultimately sprang from his “duty to protect the interests of working men and women, farmers, ranchers, businesses and our country itself.”

China’s Reaction and Possible Next Steps

Fascinatingly, Beijing responded in part by having a Chinese state-run media company run a four-page insert in Iowa’s Des Moines Register. The insert refers to the tariffs’ negative effects on Iowa’s soybean farmers as “the fruit of a president’s folly.”

An article in the Register explains the insert extolled “the mutual benefits of US-China trade, built on concern about long-term market losses, and highlighted President Xi Jinping's three-decades-long relationship with Iowa.” The article cites an Iowa State University study showing Iowa farmers stand “to lose up to $2.2 billion from US trade wars.”

China also responded to the tariffs by publishing a position paper. The Wall Street Journal quotes the paper as saying Trump’s “America First” trade policy “has brazenly preached unilateralism, protectionism and economic hegemony, making false accusations against many countries and regions, particularly China, intimidating other countries through economic measures such as imposing tariffs, and attempting to impose its own interests on China through extreme pressure.”

The position paper, which comes from China’s State Council, vigorously defends China’s trade practices, in particular the way it treats the technology and intellectual property of foreign-owned businesses. The paper claims US companies willingly cede their IP rights in exchange for access to China’s vast market and cheap production costs. It maintains, “American companies in China have received huge returns through technology transfer and licensing, and are the biggest beneficiaries of technical cooperation.”

President Xi Jinping is almost certainly viewing the US tariffs in a broad, long-term context. He will consider them, for example, against the backdrop of his own government’s trillion dollar Belt and Road global infrastructure project, as well as its Made in China 2025 plan, which seeks to transform the country into a global tech leader. The New York Times says President Xi has “invested too much politically in [these] signature programs to back down under foreign pressure.”

BBC.com echoes this, reporting that Chinese businesses and academics have noticed rising nationalism in China, along with a general feeling that the US’s trade war is at bottom an attempt to thwart China’s growing economic strength. “For China,” the article claims, “backing down is not an option — it’s preparing for a long battle.” Bloomberg likewise notes President Xi is “refusing to bow to US aggression,” and “preparing stimulus measures to cushion the impact [of the US tariffs] on the Chinese economy.”

The Effects of the Trade War on the Global Economy

The Organization for Economic Cooperation and Development released its latest Interim Economic Outlook last Thursday, and took the opportunity to remind its audience that an escalating trade war between the world's two largest economies will have widespread consequences. OECD Chief Economist Laurence Boone observed, "Trade tensions are starting to bite, and are already having adverse effects on confidence and investment plans."

As if anticipating the possibility that the US and China's scheduled trade talks were in jeopardy, Boone added, "It is urgent for countries to end the slide towards further protectionism, reinforce the global rules-based international trade system and boost international dialogue." In part because of the uncertainties created by the US-China trade war, the OECD revised its global-economy growth number downward, to 3.7 percent.

What US Companies Should Consider

Reuters also says a long US-China trade war will stunt global growth, and “companies on both sides of the Pacific are already reporting disruptions to their operations and are reviewing investment plans.”

US companies will have to review and in many cases alter their supply chains in light of the tariffs, which is easier said than done. CNN says “thousands of companies have asked the government to exclude certain products from the tariff list, claiming they cannot find another supplier outside of China for the items they need.” (Their requests so far have been unsuccessful.)

The New York Times quotes the founder of a smart-home device company as saying his organization’s “entire supply chain is based in China, so if we were to move, we would still have to procure components in China, and then export them somewhere else.”

That Times article explores how some US companies are now scrambling to avoid the effects of the trade war by moving operations from China to low-labor-cost nations such as Cambodia, the Czech Republic and Mexico. But, the article says, “China will be hard to quit” due to its masses of trained workers and robust infrastructure, from “reliable roads and rail lines connecting suppliers to assembly plants to ports.”

There will likely be other ramifications of a prolonged US-China trade war, such as inflation in the US, the widespread economic uncertainties noted in last week’s OECD report, and volatile markets. US stocks fell, for example, on the day President Trump announced the latest round of tariffs.

Some believe the US-China trade war may be resolved quickly. Al Jazeera quotes Greg Swenson, partner in a London-based banking house, as saying, “I don't think these tariffs will stay in place because they're self-defeating. It's not really going to hurt the American consumer or the American economy. In many ways, the president’s playing with the house’s money; the economy is kicking on all cylinders.”

It should be said that this optimism related to the trade war is — at least outside the Trump administration — rare. US companies should prepare for the possibility of a long fight.

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